Steve DiGregorio, portfolio manager at Canoe Financial

Focus: Canadian dividend-paying stocks
_____________________________________________________________

MARKET OUTLOOK
Short-term, we have shifted our portfolio to a more defensive position, specifically non-correlated to equity market investments to reduce volatility. We are using options, select shorts and debentures to reduce volatility through the Q3 earnings season and into December, when a rate increase might occur.

We continue to believe 2017 earnings for the S&P 500 are too high, and that we should see earning expectations come down. Ultimately, we do believe we will see an earnings re-acceleration, but this has largely been already priced into the market. We also note that the S&P 500 lost approximately 12 per cent following the rate hike of 2015, and anticipate a similar reaction should the Fed move this December.

The defensive sectors, we believe, are starting to be attractive, but it is still too early to allocate capital to these sectors (REITs, utilities, telecom). We anticipate a very good buying opportunity for these sectors in 2017.

We also believe investors should begin watching for “tax loss selling” stocks. Generally, selling of these stocks begins in November and concludes the second week of December. Currently, there are 26 S&P/TSX Composite stocks that have returns worse than -10 per cent for the year. Given the general positive return for the markets, these few tax loss candidates may face additional downward pressure.   

TOP PICKS

MAPLE LEAF FOODS (MFI.TO)
MFI remains atop of ideas. We see the company beginning to benefit from CAPEX spending to improve plant efficiencies. We believe the company will be able to improve margins over the coming quarters. In addition, commodity inputs (lean hogs) have dramatically fallen over the last three months. The company’s balance sheet is pristine with $300 million of cash, which can be used for either stock buybacks or strategic acquisitions.  

CHORUS AVIATION (CHR.TO)
It is boring, and boring is good when you are looking for stable yield. We see the eight per cent yield, driven by the CPA agreement with Air Canada, as fully sustainable. The CPA extends to 2025. Upside exists for investors should Chorus be able to extend their leasing program beyond Air Canada.    

CANEXUS DEBENTURE “D” 6 ½ 12/31/21
For investors looking to reduce risk, we see upside to par for the CUS.DB.D plus a healthy coupon in the meantime. We believe the company will either be sold to Chemtrade as per the current hostile offer, or deleverage their balance sheet through asset sales and cash flow. Either scenario proves positive for the debentures.
 

PAST PICKS: MAY 31, 2016

MORNEAU SHEPELL (MSI.TO)

• Then: $16.98
• Now: $19.46
• Return: +14.61%
• TR: +16.25%

TEN PEAKS COFFEE (TPK.TO)

• Then: $8.20
• Now: $7.35
• Return: -10.37%
• TR: -8.89%

ZCL COMPOSITES (ZCL.TO)

• Then: $8.69
• Now: $11.19
• Return: +28.77%
• TR: +30.61%

TOTAL RETURN AVERAGE: +12.66%
 

TWITTER: @CanoeFinancial
WEBSITE: www.canoefinancial.com